Is a $50 million bonus too much?

The question is whether annual incomes of up to $50-100,000,000 gained by some business men as “compensation” for a year’s work are fair and ethical?. One aspect is the seeming unfairness of taking a thousand times the pay of the average worker. Is there in actuality such a disparity in contribution to justify it, or is it just greed and ability to take that much of the companies income because of power? The ability to “take” is an important part of the problem. The interlocking interests of highly compensated company officers, board members who may “earn” hundreds of thousands, and self-interest of compensation advisers, surely help magnify the disparities built into the corporate structure. The Board and the compensation advisers are heavily dependent on the good will of the officers, and not very deeply interested in the pay scale of the lower level staff.

But at another level, is it ethical? For example, is it ethical for the president of Goldman-Sachs to receive 40 million compensation. This money is gained (earned is another question) by someone’s ability to move papers around more adroitly than can other people. By moving mortgages, loans, stocks, promissory notes, currency, insurance policies, etc, faster and smarter than someone else, assets are gained by Goldman, and similar commercial banks. But the billions taken by Goldman and company come from somewhere. Someone else has lost those billions. This money comes from assets lost by some other company, or retirement fund, or homeowner, or government. It is not money made by the bank supporting production of some real object (a machine, a TV, a refrigerator) benefitting the country, but simply by skill is moving assets. It is not interest gained from a loan helping some business to expand. In many ways it is akin to the situation a few generations ago when men, women, and children could be, legally, ruthlessly, exploited in factories. Here we have exploitation, on a global scale, that is ruthless and currently legal. It is exploitation of businesses in a legal manner. Such extreme compensation seems unethical because of the discrepancy in compensation, and the exploitation of the system by powerful financial interests.

It will be argued that the American free enterprise system allows such behavior, and that to interfere would inhibit development of businesses and stymie innovation, These banks lend money, which helps businesses grow, and that is a needed and beneficial service. That aspect is true. But agglomerating weak mortgages into a “security”, which is vetted by a subservient rating service, and sold at an inflated value, and then betting by “short sales” that the buyer will go broke, is hardly a growth strategy for the country. Borrowing money at near zero percent from the US government, and lending it at 5%, also hardly contributes to prosperity for the country.

How to correct the many aggressive but “legal” practices that end up with enormous stolen or semi-stolen profits? Certainly regulation is one answer: get rid of enormous banks and replace them with numerous smaller banks, allow companies that develop risky securitizations to fail, separate commercial lending and investment banking, better SEC and banking control, better regulation of “private” securities, heavy fines for misrepresentation by rating companies. This path is imperative, but fraught with technical and political difficulties.

We need to develop a different business ethic. Successful private enterprise has been and is the cornerstone of economic life in our country, and is the engine that has continuously raised living standards. Businesses contribute enormously to every aspect of the social and cultural life of the country. There is no incompatibility between just and adequate compensation for businessmen, and proper ethical behavior. But we desparately need a return to a business ethic that considers the best outcome for all of the members of society, and not just the most fantastic personal financial award that can be gained by any means available.

Another straight-forward approach is to introduce a more progressive income tax. The tax rate on top income levels was near 90% in the 1950s, and in now about 38%. But, for example, we might set income tax rates at 50% for income above 5 million, 70% above 10 million, and 80 % above 20 million. With this approach it would be little concern if someone received compensation of $50,000,000, since a large portion would revert to the government. Would this make the “carrot” less attractive and take away incentive? It will be instructive if any valid evidence of that effect can be found to alter behavior at these extreme levels of compensation.
Will the “brightest” move away?. There are lots of replacements willing to work for modest salaries like 5 million per year. Would this approach move money from the productive use by bank officers who receive the huge salaries and trickle down the money to the common folks? Would the government use the money more wisely, or less so?. These are reasonable questions, and the answers are not absolutely clear.

Raising the tax rate is not so wild as it first may seem, and has the historical precedent. We live today in an American society with significant under-employment, a declining middle-class income brought on by the side effects of Globalization and shipping whole factories abroad to dollar-a-day economies, and increasing disparity between the rich and the rest of the people. We have moved far from a “free enterprise” model of economy, to a ”welfare state” model, with government provision of help for aging, disability, inability, health, food and housing.. In the process we are accumulating unfunded governmental obligations that are staggering in size, being passed on to the next generation, or funded by printing and borrowing money. One fair way to help re-balance some of these problems is to share our wealth more equitably by means of a more progressive income tax.